ASU, ASC and SAS, oh my
What you need to know about recent, upcoming A&A changes
Jerome R. Reutzel, CPA, MBT | October/November 2022 Footnote
Editor's note: Updated September 30, 2022
We’re in the midst of a sea change to the accounting and auditing world.
There’s much to be understood about these ongoing changes, including some that are already effective. This article is a brief look at a handful of these A&A changes that may affect the work you do.
Gifts-in-kind changes
Nonprofits receive financial contributions and nonfinancial contributions, commonly known as “gifts-in-kind.” The Financial Accounting Standards Board (FASB) made the determination that financial statement users needed more information related to gifts-in-kind due to their subjectivity in value, their nature of past presentation and the reliance nonprofits may have on such contributions.
ASU No. 2020-07 applies to nonprofits that receive contributed nonfinancial assets. The presentation has changed, but the recognition and measurement requirements are unaffected. Under ASU No. 2020-07, gifts-in-kind received will be presented as a separate line item in the statement of activities.
Further disclosures are required for each category of gifts-in-kind received:
- Qualitative information regarding whether gifts-in-kind were converted to cash or used during the reporting period.
- Policy for converting gifts-in-kind to cash versus using gifts-in-kind.
- Description of associated donor restrictions.
- Description of valuation criteria used to arrive at a fair market value.
- Description of principal market used to arrive at fair market value if it is a market in which the nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.
ASU No. 2020-07 is effective for annual reporting periods beginning after June 15, 2021, and interim periods within fiscal years beginning after June 15, 2022, with early adoption permitted. Retrospective application is required.
Financial statement presentation of relief funding
Due to the pandemic, nonprofit organizations have received additional relief funds. If an organization expends direct or indirect federal awards in excess of $750,000 within a fiscal year, they may fall under the Single Audit Act for their federal activities.
The Employee Retention Credit (ERC) reporting falls under Subtopic 958-605: Nonprofit Entities, Contributions Received. If the ERC is received in advance, a liability should be recorded. Grant revenue would be recognized when the conditions to earn the credit are substantially met.
Paycheck Protection Program (PPP) money should be presented as a loan on the balance sheet when money is received. Depending on whether you expect the loan to be forgiven, a nonprofit may follow ASC 470: Debt or Subtopic 958-605: Nonprofit Entities, Contributions Received to record the loan.
Changes to the Independent Auditor’s Report: SAS 134 and 137
The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 134,
Auditor Reporting and Amendments, including Amendments Addressing Disclosures in the Audit of Financial Statements.
The standard changes the layout of the audit report to converge with International Standards and create consistency with the Public Company Accounting Oversight Board (PCAOB):
- The report starts with the audit opinion.
- The audit opinion is followed by the “Basis for Opinion” paragraph, which sets the users’ expectations for the audit report.
- Key Audit Matters (KAMS) is an optional disclosure, which allows the auditor to communicate significant matters to those charged with governance that are deemed to be the most important and significant to the audit of the financial statements based upon the auditor’s professional judgment.
- The “Responsibilities of Management” section must include an evaluation as to whether there are conditions or events, considered in the aggregate, that raise substantial doubt about a company’s ability to continue as a going concern. If it is determined by the auditor that substantial doubt exists, auditors are required to state this fact in a separate section of the auditor’s report.
- The report will also include required statements regarding management and the auditor’s responsibilities in relation to the audit.
The new rules were effective for audits of financial statements covering periods ending on or after Dec. 31, 2021. SAS 134 one of several SAS (134–140), which affect or will affect the format and layout of auditor reports.
SAS 137,
The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports. This SAS clarifies the auditor’s objective having read the other information included in annual reports, including determining whether a material inconsistency exists, remaining alert for indications of material misstatement of facts, responding appropriately, reporting appropriately and outlining for what auditors are and are not responsible.
ASC 842, leases
The new lease standard is finally effective for both lessees and lessors of nonpublic entities for fiscal years ending after Dec. 15, 2021. ASC 842 changes the financial reporting requirements of organizations that enter into leasing transactions or other contracts for assets such as real estate, vehicles and equipment.
These are the changes:
- Lease agreements will need to be identified, inventoried and reviewed to identify changes necessary to comply with the new standards. This could include embedded lease arrangements.
- Financial reporting changes could impact loan covenants, key performance indicators and capital decisions.
- Additional presentation and footnote disclosures will be required.
The primary impact will be the addition of “right-of-use” assets and lease obligations to the financial statements. Generally, the impact to the Statement of Activities will be minimal.
Goodwill and intangibles
Simplified accounting alternatives are available to nonprofits for reporting goodwill and certain identifiable intangible assets already available to private companies. For goodwill, nonprofits may choose to amortize goodwill on a straight-line basis for 10 years or less. Nonprofits that adopt this accounting alternative may also choose to use the alternative for identifiable intangible assets to bypass the separate recognition of noncompete agreements and certain customer-related intangible assets.
Jerome R. Reutzel, CPA, MBT, is a principal with the firm Boeckermann, Grafstrom & Mayer, LLC, performing in-charge and quality control responsibilities for the firm’s audit, accounting and tax clients. He has a very broad background of work experiences in accounting, consulting and taxation. His client base includes broker-dealers, franchisers, governmental entities, hotels, manufacturers, distributors, nonprofits, private schools, retailers and professional services.
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